Profit, Loss and OCI | Sahithyan's Notes

Profitability is measured in stages, ending with items recognized outside profit or loss.

Trading Account

The trading account calculates gross profit earned from buying and selling goods over a period (usually a fiscal year).

Purchases
Cost of all goods bought during the year, adjusted for carriage in, import duty, and purchase returns.
Opening stock
Value of stock carried over from the previous year, the first to be sold in the new year.
Closing stock
Value of goods remaining at year end, excluded from cost of sales since it was not sold during the year.
Carriage inwards
Freight cost to bring purchased goods from the supplier to the business. A direct expense, added to the cost of purchases.
Return inwards (sales returns)
Goods sold to customers and later returned by them. Deducted from sales.
Return outwards (purchases returns)
Goods bought from suppliers and later sent back. Deducted from purchases.

\text{Net Purchases} = \text{Purchases} - \text{Return Outwards} + \text{Carriage Inwards}

\text{Net Sales} = \text{Sales} - \text{Return Inwards}

\text{Cost of Sales} = \text{Opening Stock} + \text{Net Purchases} - \text{Closing Stock}

\text{Gross Profit} = \text{Net Sales} - \text{Cost of Sales}

Profit or Loss

Builds on gross profit from the trading account to arrive at net profit for the period.

\begin{aligned} \text{Net Profit} = \ &\text{Gross Profit} \\ + \ &\text{Other Income} \\ - \ &\text{Administrative Expenses} \\ - \ &\text{Distribution Expenses} \\ - \ &\text{Finance Expenses} \end{aligned}

Other Comprehensive Income

Items of income and expense not recognized in profit or loss, recognized directly in equity instead. Excluded from net profit because they represent unrealized or non-operating value changes, not the result of trading activity.

Revaluation surplus
Gain from revaluing property, plant, and equipment above cost.
Foreign currency translation differences
Gains or losses from converting a foreign operation’s results into the reporting currency.
Actuarial gains and losses
A company estimates what it owes employees under a fixed-payout pension plan, based on assumptions like life expectancy, salary growth, and discount rate. When those assumptions are revised, the estimated obligation changes; that change is the actuarial gain or loss.